Seagate beats Street, stock up 10 percent

SAN FRANCISCO Wed Jan 20, 2010 6:48pm EST

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SAN FRANCISCO (Reuters) - Seagate Technology (STX.O) blasted past expectations on aggressive cost cutting and buoyant demand for servers and personal computers over the holidays, lifting its shares more than 10 percent.

The results and a higher margin outlook underscored hopes that disk drive makers such as Seagate and rival Western Digital WDC.N will benefit from a resurgence in corporate technology spending in 2010.

Seagate shares, which hit a 52-week high of $19.04 at the beginning of the year, jumped 10.4 percent in after-hours trade to $19.60. Western Digital gained 4.2 percent to $46.15.

The world's largest maker of disk drives posted a gross margin of 30.5 percent in its fiscal second quarter. Seagate Chief Executive Steve Luczo said he expects the company to operate above its stated target gross margin range of between 22 percent and 26 percent in 2010.

"If you'd asked me a quarter ago, the ceiling was 28 percent -- that was the highest we ever did," said Seagate Chief Financial Officer, Patrick O'Malley, adding that given the supply constraints and the company's positioning in the market, he doesn't expect margins to go above the second quarter's results.

"I don't have a plan to go higher," he added.

"They were able to do this without a recovery in demand," Needham and Company analyst Richard Kugele said.

Disk drive demand -- which was pummeled in the recession as corporations and consumers curtailed spending to conserve cash -- was showing signs of a gradual recovery, analysts say.

The company said on Wednesday net income rose to $533 million in its fiscal second quarter ended January 1, reversing a loss of $2.82 billion in the year-ago period.

Excluding items such as amortization expenses, Seagate earned $1.05 a share, ahead of the average analyst estimate of 65 cents a share, according to Thomson Reuters I/B/E/S.

Revenue rose to $3.03 billion, versus the Wall Street target of $2.85 billion.

(Reporting by Ian Sherr; Editing by Richard Chang, Leslie Gevirtz and Bernard Orr)

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